A Handbook for the Independent Executor

Transcription

1 A Handbook for the Independent Executor

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3 TABLE OF CONTENTS Caption Page I. Introduction II. The Appointment Process A. Probate of Will B. Notices D. Issuance of Letters Testamentary E. Bond III. General Duties of Independent Executors A. Overview B. Application of General Fiduciary Duties C. Collection of Information IV. Duty to Keep Records and Accounts A. Setting Up the Books and Records of the Estate B. Accounting Program C. Custodianship Accounts D. Record-keeping By Hand E. Maintenance of Records F. Required Accountings G. Accountings Required by Will H. Additional Accountings V. Tax Related Filings A. Application for Taxpayer Identification Number (Form SS-4) B. Notice of Fiduciary Relationship (Form 56) C. Decedent s Final Income Tax Return D. Income Tax Returns for the Estate E. Federal Estate Tax (and Generation-Skipping Tax) Return (Form 706) VI. Required Court Filings A. Inventory, Appraisement and List of Claims B. Notice to Beneficiaries C. Notice to Creditors E. Closing the Estate VII. Specific Recommended Steps That May Be Needed A. Securing the Personal Residence of the Decedent (i)

4 Caption Page B. Secure Valuables C. Insurance D. Mortgage Information E. Dealing with Personal Property F. Inventory of Personal Items G. Automobiles H. Dividing Personal Property Among Beneficiaries I. Credit Cards and Bank Debit Cards J. Safe Deposit Box K. Set Up Estate Bank Accounts L. Consolidation of Accounts M. Setting Aside Family Allowances and Exempt Property N. Review Assets Held by the Estate O. Funding Specific Bequests VIII. Dealing with Claims by Creditors A. Ability to Pay Claims when Estate is Solvent B. Classification of Claims C. Notices to Creditors D. Duty with Regard to Non-Probate Assets IX. Sale of Estate Assets A. Sale of Real and Personal Property B. Direct or Indirect Sales to Independent Executor X. Property Subject to Administration by the Independent Executor A. General B. When Spouse is Independent Executor C. Disposition of Community Estate at Termination of Administration D. Early Partition and Distribution of Community One-Half XI. Obtaining Consents from Beneficiaries A. Disclosure to Beneficiaries B. Consents and Releases by Beneficiaries XII. Estate Taxes and Allocation of Estate Taxes to Beneficiaries A. Due Date for Estate Taxes B. Selling Assets to Pay Estate Taxes C. Personal Liability (ii)

5 Caption Page XIII. Communications with Beneficiaries A. Send Pertinent Estate Planning Documents to the Beneficiaries B. Timetable of Estate Events C. Regular Accountings D. Disclaimer Options E. Tax Allocations F. Important Estate Transactions G. Distribution Planning H. Income Tax Results XIV. Final Settlement of Estate and Distribution to Beneficiaries XV. Closing the Estate Administration A. No Official Closing B. Closing of Estate by Affidavit C. Judicial Discharge XVI. Executor s Fees and Compensation A. Provisions of Will B. Statutory Fees C. Review With Counsel D. Court Approval E. Income Taxation of Fees EXHIBIT A: PROCESS TO OBTAIN EMPLOYER IDENTIFICATION NUMBER EXHIBIT B: NOTICE TO BENEFICIARY EXHIBIT C: NOTICE TO SECURED CREDITOR EXHIBIT D: NOTICE TO UNSECURED CREDITOR EXHIBIT E: TIMETABLE OF IMPORTANT ESTATE FUNCTIONS EXHIBIT F: INVENTORY INFORMATION FORM (iii)

6 A HANDBOOK FOR THE INDEPENDENT EXECUTOR I. Introduction. This Handbook is designed to assist you in performing your duties as Independent Executor, by providing you with a resource for reference and general information. I encourage you to use it as a reminder of matters that need to be handled, as well as a springboard for discussion with the attorney for the estate. It is not designed to be a comprehensive discussion of the matters involved in an independent administration in Texas, nor is it intended to substitute for legal advice that you should obtain in the course of the estate administration. You should continue to work closely with your counsel and accountant in administering the estate. First, there are a few general recommendations for you as you begin your duties. These are: A. Read the Will and discuss its provisions with your counsel, and follow the terms of the Will. It is your guide, road map and rule book. B. Follow the Independent Executor s Golden Rule: treat estate beneficiaries as you would want an Independent Executor to treat you if you were the beneficiary. C. Be prompt in performing your duties and responsive to the attorney for the estate and its beneficiaries. If your personal or business situation is likely to prevent this, it may be advisable for you to decline to serve. II. The Appointment Process. A. Probate of Will. Before an Independent Executor can assume his or her duties as such, the will must be admitted to probate and the court must appoint the Independent Executor. The will cannot be admitted to probate until on or after the first Monday after ten days have elapsed from the date of filing the will. This means that wills filed on or before Thursday of a given week can be admitted to probate on or after the second Monday following the filing date. The filing will have to be made by a certain time of day on that Thursday in order to ensure that notice can be posted for the requisite period of time. The application can be filed by any person interested in the estate (such as a beneficiary or creditor of the estate), or by any person named in the will as executor. If an executor named in the will makes application for a will to be admitted to probate in good faith with just cause, the reasonable expenses of the applicant are to be paid from the estate, even if the will is not ultimately admitted to probate. SECTION , TEXAS ESTATES CODE. B. Notices. Pursuant to the Texas Estates Code, the only pre-hearing notice that is required is the posted public notice. Therefore, heirs and beneficiaries of the estate do not generally need to be notified prior to the hearing date, though they do need to be notified and given a copy of the will afterward. Some counties (including Denton), however, may have local rules of law that require additional notices. The public notice that is posted is prepared by the clerk s office. It may be necessary for the attorney to prepare notices under local rules. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 1

7 III. C. The Probate Hearing. The attorney will set a hearing for the probate of the will to occur on or after the Monday following ten days from the filing of the will. A special setting may be scheduled for this hearing, or the court may require the hearings to occur during open court when a number of uncontested matters will be before the court. The hearing typically does not exceed five to ten minutes. Testimony must be given by someone familiar with the decedent who is familiar with the will and the circumstances of the decedent s death. Testimony does not have to be given by the person named as executor in the will, but it is frequently most convenient for the person named as executor in the will to be present. D. Issuance of Letters Testamentary. After the court has signed the order admitting the will to probate, and appointing the Independent Executor named in the will, the Independent Executor will sign an oath. Once this oath has been filed with the clerk s office, the clerk will issue Letters Testamentary (or Letters of Administration in the case of a person not named as executor in the will). These Letters will be proof to third parties dealing with the executor that he or she has powers as Independent Executor of the estate. In many cases, the Independent Executor will be required to supply original letters testamentary to the third party. Therefore, when Letters Testamentary are obtained, enough copies should be obtained to allow the Independent Executor to deal with the various entities that hold assets belonging to the decedent. Additional Letters Testamentary can be obtained by the Independent Executor or his or her attorney. For certain types of transfers, such as stock transfers, Letters Testamentary must be dated within 60 days of the date they are issued. As a result, it may be necessary for an Independent Executor to obtain fresh Letters Testamentary at some point during the administration when transfers are being made. E. Bond. In most independent administrations, no bond will be required. This is because Wills typically relieve an executor of the requirement to post a bond. If a bond is required, no Letters Testamentary of Letters of Administration can issue until the bond has been filed and approved by the court. General Duties of Independent Executors. A. Overview. In very broad terms, the duty of the Independent Executor is to collect all of the assets due to the estate, pay all of the debts and expenses of the estate, set aside exempt property and allowances for the family, and distribute the estate to the beneficiaries of the estate. B. Application of General Fiduciary Duties. An Independent Executor is a fiduciary for the beneficiaries and persons interested in the estate. Under Texas law, an executor is generally held to the same fiduciary standard as is a trustee. Humane Society of Austin and Travis County v. Austin National Bank, 531 S.W.2nd 574, 577 (Tex. 1975). This means that the Independent Executor owes to the beneficiaries of the estate A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 2

8 fiduciary duties similar to those owed by a trustee to a trust beneficiary. Generally, a trustee s duties (and therefore the duties of an Independent Executor) include the following: 1. Duty of Loyalty. It is the duty of the fiduciary to administer the estate solely in the interest of the beneficiaries. The fiduciary is not permitted to place himself in a position where it could benefit him to violate his duty to the beneficiaries. 2. Duty Not to Delegate. The fiduciary is under an obligation to personally administer the estate and may not delegate to others acts that the fiduciary should personally perform. 3. Duty to Keep and Render Accounts. A fiduciary is under a duty to the beneficiaries to keep full accounts that are clear and accurate. Sections and of the Texas Estates Code give a beneficiary the right to demand a written statement of accounts covering the estate s transactions at certain times. 4. Duty to Furnish Information. A fiduciary is under a common law duty to the beneficiaries at reasonable times to give complete and accurate information regarding the estate. 5. Duty to Exercise Reasonable Care and Skill. A fiduciary is under a duty in administering the trust or estate to exercise the same care and skill as a man of ordinary prudence would use in dealing with his own property. 6. Duty to Take and Retain Control of Trust Property. The fiduciary is under a duty to take all reasonable steps to obtain and control the estate property. 7. Duty to Preserve Estate Property. A fiduciary must use the same care and skill that a person of ordinary prudence would use to preserve estate property. 8. Duty to Enforce Claims. A fiduciary is under a duty to take reasonable actions to collect claims that are due to the estate. 9. Duty to Defend. The fiduciary is under a duty to do what is reasonable, under the circumstances, to defend actions by third parties against the estate. 10. Duty Not to Co-Mingle Estate Funds. The fiduciary has a duty to keep estate property separate from other property, and to properly designate it as estate property. Not only is it the fiduciary s duty to keep the estate property separate from the fiduciary s own property, but also to keep that property separate from other estates or trusts the fiduciary may administer. 11. Duty With Respect to Bank Deposits. Although a fiduciary may deposit funds in a bank, he is under a duty to use reasonable care in selecting the bank and to properly designate the deposit as an estate deposit. He may not subject the deposit to unreasonable restrictions on withdrawal or leave the property in non- A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 3

9 IV. interest bearing accounts for unduly long periods of time. 12. Duty With Respect to Investments. Because an Independent Executor s primary responsibility is to collect estate assets, pay creditors and distribute the estate, the Executor will not typically actively manage investments. The Independent Executor cannot ignore the investments, however, as he or she does have the duty to preserve estate property. If the assets of the estate require active management in order to preserve value, or when the estate administration will continue for a lengthy time, the Independent Executor should oversee the management required in a prudent manner. 13. Duty to Deal Impartially With Beneficiaries. When there are multiple beneficiaries of an estate, it is the duty of the fiduciary to deal impartially among the beneficiaries. An executor will face tax elections and other situations that will require careful attention to impartiality. 14. Duty With Respect to Co-Fiduciaries. Unless the will provides otherwise, all fiduciaries are under a duty to participate in the estate administration. Therefore, a fiduciary cannot properly delegate the acts required of the fiduciary to cofiduciaries. It is also the duty of a fiduciary to use reasonable care to prevent other fiduciaries from committing a breach of trust. Pursuant to Texas law, any Executor can act alone to bind the estate, except that all executors must execute any conveyance of real estate. Section , Texas Estates Code. Nonetheless, coexecutors should act in concert whenever possible. C. Collection of Information. The Independent Executor will collect information regarding the estate for the preparation of the Inventory and Estate tax return (when required). An Inventory Information Form is attached as Exhibit F which can be used for this purpose. Duty to Keep Records and Accounts. It is imperative that the Independent Executor keep detailed records for the estate from the time that the Independent Executor first assumes his or her duties. Establishing proper accounts and recordkeeping procedures at the outset will greatly simplify the Independent Executor s job. A. Setting Up the Books and Records of the Estate. It will be difficult and time consuming for an Independent Executor to supply the appropriate accountings that it is his duty to provide if adequate books and records have not been established and maintained during the administration of the estate. There are a variety of ways that this record-keeping can be accomplished that will enable the Independent Executor to provide regular accountings with a minimum of effort. These are discussed in more detail in the following sections. B. Accounting Program. There are a number of financial software packages (such as Quicken by Intuit or Peachtree Accounting) that can assist the Independent Executor A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 4

10 in the record-keeping process. Most of these retail for less than $100. Although Quicken and similar financial programs are not specifically designed for estate administration, they can be modified very easily to provide meaningful reports to the beneficiaries and maintain detailed records for the Independent Executor. There are fiduciary accounting packages that provide more traditional fiduciary accountings for estates, but their cost tends to be significantly more than Quicken and other more general programs. In addition, they tend to be far less user-friendly. Once the assets of an estate have been set up on Quicken or a similar program, checks can be entered and printed directly from the program, thus recording and categorizing expenses, income and sales or dispositions of property as they occur. Reports can then be produced quite easily as needed. C. Custodianship Accounts. For larger estates, estates in which there are likely to be complex or large numbers of transactions, or estates in which there may be potentially contentious beneficiaries, the Independent Executor may want to consider setting up a custody account at a financial institution to hold the liquid assets of the estate. The financial institution will then produce monthly or quarterly statements showing the assets, disbursements, disposition of assets and other transactions, which can be disseminated to beneficiaries as well as to the Independent Executor. For beneficiaries who treat the Independent Executor with suspicion, holding the liquid assets in this manner can provide comfort to the beneficiaries and therefore may reduce discord with the Independent Executor. D. Record-keeping By Hand. This method is generally not recommended unless the estate is very simple and limited transactions will be occurring. Although there is no requirement that records be kept on a computer, reconstructing the estate transactions from hand-maintained records can be time-consuming. Nonetheless, as long as the Independent Executor keeps copies of all of the checks written, account statements from all financial institutions in which assets are held, records of any sales of assets and disposition of proceeds, etc., the Independent Executor will be able to produce an accounting if and when one is demanded by a beneficiary, and at the close of the estate. E. Maintenance of Records. Because of the Independent Executor s duty to keep and render accounts, it is imperative that the Independent Executor maintain adequate records during the course of the administration, and in some cases for a number of years thereafter. All statements from banks, financial institutions and other entities holding assets of the estate should be maintained. In addition, invoices or other evidence of debts or expenses paid by the estate should be maintained in the file. Copies of stock certificates that are surrendered should be maintained, together with copies of checks or wire transfers indicating the proceeds received from the disposition of those items. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 5

11 F. Required Accountings. Section of the Texas Estates Code allows a beneficiary to demand from an Independent Executor, at any time after 15 months has expired from the date the Independent Executor qualifies as such, an accounting for the estate. The information required to be included the following: 1. The property belonging to the estate which has come into the hands of the Independent Executor. 2. The disposition that has been made of such property. 3. The debts that have been paid. 4. The debts and expenses still owing, if any, by the estate. 5. The remaining property of the estate. 6. Such other facts as may be necessary to a full and definite understanding of the exact condition of the estate. 7. Such facts, if any, that show why the administration should not be closed and the estate distributed. In addition, Section of the Texas Estates Code also gives a beneficiary the right, after two years from the date that an independent administration is created, to require a similar accounting and distribution of the estate unless the court finds there is a continued necessity for administration. This right is in addition to the right to an accounting under Section 149A. G. Accountings Required by Will. The Independent Executor must always comply with the terms of the will. If more frequent accountings are required by the Will, the Executor must supply them. H. Additional Accountings. Beneficiaries of estates frequently become disgruntled because of lack of information about estate matters. In estates which will continue for a lengthy period of time, frequently supplied accountings to keep the beneficiaries up to date on the progress of the estate will be time and effort well spent by the Independent Executor. V. Tax Related Filings. For most estates, the Independent Executor will be required to make a number of tax-related filings. The Independent Executor should consult with his or her accountant and attorney with regard to the applicability of these in any given estate, but these may include the following: A. Application for Taxpayer Identification Number (Form SS-4). In general, immediately after appointment as Independent Executor, the Independent Executor should obtain from the Internal Revenue Service a Taxpayer Identification Number (Form SS-4) which will be used for the estate during the course of the administration of the estate. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 6

12 Attached as Exhibit A are instructions on obtaining the SS-4 from the Internal Revenue Service. B. Notice of Fiduciary Relationship (Form 56). It may be advisable to file a Form 56 which notifies the Internal Revenue Service that the Independent Executor is serving in that capacity. The purpose of this is to put the Internal Revenue Service on notice as to the proper party to notify should there be a tax issue that arises with respect to the decedent. If the Service is not on notice that a fiduciary has been appointed, and if a deficiency or similar tax notice is sent to the last address used by the decedent on a tax form, and is not forwarded to the Independent Executor, the rights of the decedent s estate to challenge actions by the IRS may be jeopardized. In cases in which there is a surviving spouse who has been filing joint income tax returns with the decedent, or in cases in which a responsible party will remain at the decedent s last address to receive any notices, this potential problem is less likely to arise. Nonetheless, it is fairly simple for the Independent Executor to fill out the Form 56 so that the Internal Revenue Service is on notice as to the proper party to receive notices on behalf of the decedent. C. Decedent s Final Income Tax Return. The Independent Executor will have the responsibility for filing the decedent s final income tax return. Typically, a certified public accountant will be hired by the Independent Executor to perform this duty, but in some simpler estates, the Independent Executor may prepare this return. D. Income Tax Returns for the Estate. During the course of the administration of the estate, a fiduciary income tax return (Form 1041) must be filed for the estate for each year. These returns will be due the 15 th day of the fourth month following the close of the estate s fiscal year. A certified public accountant normally prepares these returns for the Independent Executor. There may be some tax benefit to selecting a fiscal year end other than December 31 in some cases, but in many cases, the simplicity of using a calendar year end will outweigh these benefits. Estimated tax payments will not be required for the estate unless the estate administration lasts longer than two years. E. Federal Estate Tax (and Generation-Skipping Tax) Return (Form 706). If an estate meets the filing requirement, a Form 706 must be filed for the decedent s estate, even if no taxes will be due. The estate tax return is typically prepared by the attorney. In some cases, accountants who do a substantial amount of work in the estate area will prepare the return instead. This return is required to be filed nine months following the date of the decedent s death. An extension can be obtained for up to six months following that original due date (15 months from the date of the decedent s death). This extension, however, is not an automatic extension and must be specifically requested and approved by the Internal Revenue Service. Requests are routinely approved. If the decedent has a gross estate of more than $5,250,000, the return must be filed. The Independent Executor should carefully review with the A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 7

13 VI. estate s attorney and/or the accountant the assets of the decedent that would be considered to be included in the estate for estate tax purposes. Assets of the decedent which pass outside of probate (such as life insurance and retirement benefits) will be included in the gross estate, so the Independent Executor will need to obtain information regarding the non-probate assets as well. In addition, if taxable gifts were made during lifetime (gifts in excess of $10,000 to $13,000 per person per year), those gifts will have to be taken into consideration in determining whether the filing requirement is met. Required Court Filings. An Independent Executor is generally free from court supervision, and thus may act on behalf of the estate without additional court authority. Nonetheless, in addition to the original court filings for the Independent Executor s appointment, there are a few court filings that are required or may be advisable. A. Inventory, Appraisement and List of Claims. 1. The Independent Executor is required to file an Inventory, Appraisement and List of Claims (the Inventory ) within 90 days of the date the Independent Executor qualifies. TEXAS ESTATES CODE SECTION Qualification occurs when the Order appointing the Independent Executor has been signed by the court, and the Independent Executor has filed his or her oath with the court (and posted bond, if applicable). The Inventory must list all property of the estate which has come into the possession or knowledge of the Independent Executor, including all real property in the State of Texas and all personal property wherever situated. The Independent Executor must set out in the Inventory the fair market value of each item thereof as of the date of death. The Inventory values are typically determined by the Independent Executor, with information from appraisers hired by the Independent Executor or the attorney for the estate, where appropriate. The court does have the authority to appoint an appraiser of the estate, in which case those appraisers assist the Independent Execute in determining the value of the property. Court-appointed appraisers are very rarely, if ever, utilized in independent administrations. The Inventory must specify the property as being separate or community. In addition, if property is co-owned with others, the interest owned by the estate must be shown, together with the names and relationship of coowners. The Inventory must also contain a list of claims setting out all claims due or owing to the estate. These are not claims that the estate owes, but rather are owed to the estate. The Inventory must contain an affidavit by the Independent Executor sworn before a notary public that the Inventory is a true and complete statement of the property and claims of the estate that have come to the Independent Executor s knowledge. The Independent Executor is not required to list property that passes outside of the probate estate (such as life insurance and other assets that pass by beneficiary designation or contract rights, and property A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 8

14 VII. in revocable management trusts or living trusts). 2. Extension of Time to File Inventory. Most courts will routinely grant extensions of time to file inventories in independent administrations, particularly when an estate tax return is required to be filed. Some courts may require the consent of beneficiaries for an extension request. In cases in which an estate tax return will be filed, it is common to request an Inventory extension so that appraisals can be obtained prior to the time the Inventory is filed and items of the estate can be treated consistently on the Form 706 (estate tax return) and the Inventory. B. Notice to Beneficiaries. Within sixty days of the date of the Order Probating Will, the Independent Executor is required to give anyone named as a devisee in a will, if the address of the person or entity can be ascertained with reasonable diligence, notice that the person or other entity is named as a devisee in the will. A copy of the Order admitting the will to probate and copy of the will must normally be attached. The notice must be sent by registered or certified mail, return receipt requested. Often the simpler procedure, especially with family members and friends, is to get each devisee to sign a Waiver of this notice and file those with the Affidavit. Following the notice, the applicant must file an affidavit with the court in which the will was admitted to probate that the proper notices were given. There are some exceptions: the procedure is set forth in Sections of the TEXAS ESTATES CODE. A sample notice is attached as Exhibit B. C. Notice to Creditors. The Independent Executor must file a copy of the printed notice to creditors (detailed in paragraph VIII.C.1 on page 14 of this Handbook), together with an affidavit of the publisher, in the court in which the cause is pending. D. Affidavit of Notice to Secured Creditors. A copy of each notice (detailed in paragraph VIII.C.2 on page 14 of this Handbook) must be filed with the court along with an affidavit that the notices were properly provided. E. Closing the Estate. In many independent administrations, the estate will never be officially closed with the court. In some cases, however, the Independent Executor may utilize one of the closing methods described in Section XV of this Handbook. Specific Recommended Steps That May Be Needed. Although the actions listed below will not be appropriate or necessary in every estate administration, the Independent Executor should consider the following to determine if action is required. A. Securing the Personal Residence of the Decedent. If a spouse survives the decedent, the surviving spouse has the sole and exclusive right to continue occupying the residence until the surviving spouse s death or abandonment of the residence. If there is no surviving spouse (and no minor children with similar rights), the Independent Executor should take steps to secure the residence. These might include the A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 9

15 following: 1. Change locks so that persons who may have had access keys during the decedent s lifetime are no longer able to enter the residence without the consent of the Independent Executor. To avoid creating adversarial situations where none exist, the Independent Executor should communicate this to the beneficiaries of the estate so that the beneficiaries do not feel unnecessarily shut out of the administration. Although it is the Independent Executor s duty and responsibility to administer the estate and safeguard the property, this needs to be done with sensitivity to the beneficiaries and their needs, if the Independent Executor does not want to create a hostile situation which may ultimately lead to claims being made against the Independent Executor. 2. Stop deliveries and utilities, where appropriate. Newspaper deliveries and other deliveries that may be made to the house should be stopped. It may be advisable for utilities such as water, gas and electric to be left on to protect the house. The Independent Executor may want to evaluate whether phone service continues to be necessary. Items such as cable television should be discontinued. B. Secure Valuables. If any cash, jewelry or other valuables are found in the residence or other premises, they should be carefully inventoried by the Independent Executor and placed in a safe deposit box or other appropriate place for safekeeping. C. Insurance. The Independent Executor should confirm that insurance is in place on all real property, automobiles and other valuables. The Independent Executor should review the homeowner s policies to determine how long the residence may remain vacant without jeopardizing insurance coverage. D. Mortgage Information. The Independent Executor should determine whether there are any mortgages on the residence or other property, and if so, determine their status and the proper method for payment. E. Dealing with Personal Property. 1. The Independent Executor should determine how the personal property of the estate will be handled. Frequently, items such as furniture, furnishings, jewelry, clothing, etc., are left to a specified individual or group of individuals. If there is a surviving spouse and/or minor children, the Texas Estates Code provides that the property of the estate that is exempt from execution or for sale under Texas law (which would generally include items of personal use, such as furniture, furnishings, cars, etc.) be set apart for the use and benefit of the surviving spouse and minor children and unmarried children remaining with the family during the administration. If the estate is determined to be solvent at the final settlement of the estate, then those items will be subject to distribution among the heirs and distributees of the estate. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 10

16 2. After the temporary setting aside of exempt property as discussed above, the Independent Executor should follow carefully the provisions of the will in terms of distributing the personal property of the decedent. For personal property not disposed of by the will, and assuming the Independent Executor has authority pursuant to the will to sell property, the Independent Executor may want to arrange an estate sale to dispose of the personal property of the estate. In order to avoid problems, this is something the Independent Executor should discuss with the beneficiaries of the estate prior to selling items that may have sentimental value to the beneficiaries. F. Inventory of Personal Items. In any event, the Independent Executor may want to obtain an early inventory of items in the residence and other places in which there is property belonging to the decedent. There are appraisers available who for a relatively small fee will inventory the assets of the house. If an Independent Executor anticipates any problems with the family, it would be wise to have an immediate inventory made to avoid questions arising at a later date from the beneficiaries. G. Automobiles. The Independent Executor should make arrangements for the automobiles of the estate to insure that they do not create liability for the estate. Insurance should be checked to make sure that it is still in effect. The automobiles should be stored in as secure a manner as possible without undue cost. If the automobiles are left to a specific individual or individuals, and if they are not set aside as exempt property to a spouse or surviving spouse, it would be advisable for the Independent Executor to distribute these as soon as possible in a solvent estate, so that the expense of maintaining the automobiles passes to the beneficiaries. To do this, the car title should be changed with the Department of Motor Vehicles. H. Dividing Personal Property Among Beneficiaries. In many cases, the personal property of the estate will be left to multiple beneficiaries (such as the children of the decedent). In this case, the will may state how the property is to be divided. In many cases, however, the will simply states that the property will be distributed as determined by the executor, or as agreed upon by the beneficiaries. Even if the executor is to make the determination, it is wise to do this with the participation of the beneficiaries. If the beneficiaries are unable to agree between themselves as to the disposition of the personal property, the executor may want to devise a system to govern the distribution of items. For example, the beneficiaries could have a meeting at which each draws a number and selects items in the order drawn. Alternatively, the executor may want to ask for a list from each beneficiary of the items that they want in the order that they desire the items, and compare lists and priorities and make a determination between the beneficiaries. Once again, the executor should make sure that whatever method he or she selects is not at odds with the terms of the will, unless all of the beneficiaries have agreed that they wish to have it distributed in some way other than as provided in the will. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 11

17 I. Credit Cards and Bank Debit Cards. The Independent Executor should notify any financial institutions which issued credit cards or bank debit cards to the decedent of the decedent s death. The cards should be destroyed by the Independent Executor. In addition, the Independent Executor may wish to give the discretionary notice to creditors discussed in Section VIII.C.3 to all credit card companies and banks with whom the decedent has known to have done business. J. Safe Deposit Box. The Independent Executor should gain access to any safe deposit boxes held by the decedent for the purpose of determining whether any valuable items are in those safe deposit boxes. If any safe deposit boxes permit joint access by persons other than the Independent Executor, the Independent Executor may find it advisable to move any such valuable items that belonged to the decedent to a safe deposit box accessible only by the Independent Executor. In visiting the safe deposit box, the Independent Executor may want to take the beneficiaries with him to view the contents as they are opened, or may want to take another credible person who can testify as to the contents of the box. It is not uncommon for beneficiaries to believe that items were kept in a safe deposit box or were held by the decedent which had been disposed by the decedent many years ago (or are simply missing). Credible third parties or beneficiaries who will witness and inventory the box the first time that it is entered by the Independent Executor can be valuable allies if a question is later raised with regard to missing valuables. A written inventory can be prepared at that time, signed by the third party. K. Set Up Estate Bank Accounts. Shortly after appointment, the Independent Executor will need to set up accounts at banks or other financial institutions to transact the business of the estate. In general, the estate will need an account on which checks can be written for the payment of expenses and debts of the estate. Unless size of account and account fees makes this unwise, it is typically desirable to set this up in an interest-bearing account. In addition, the Independent Executor is likely to need to set up one or more additional accounts to hold the more significant assets of the estate. To the extent assets are in financial institutions, the deposits should be fully covered by the FDIC or should be otherwise evaluated for safety of the principal. The Independent Executor may want to consider setting up a custodianship account with a financial institution. It is generally advisable to set up the minimum number of accounts that will allow the Independent Executor to effectively manage the estate. It is easier for record-keeping purposes if all debts and expenses flow through a single account, such as the estate s checking account. Money can be periodically moved to this account from investment accounts as needed. L. Consolidation of Accounts. If the decedent held multiple accounts at a variety of financial institutions, such as brokerage houses and mutual funds, the Independent Executor may want to consolidate these accounts for ease in administration. A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 12

18 VIII. M. Setting Aside Family Allowances and Exempt Property. In the vast majority of estates, no property will be set aside to the surviving spouse and minor children as exempt property, homestead, or family allowance. This is because in most cases, the estate will in fact pass to the person or persons who would be entitled to have these set asides. Nonetheless, the Independent Executor should be aware that there are cases in which exempt property (such as personal effects, cars, furniture, etc.), the primary residence of a decedent, and property sufficient to support the family for a year, may be required to be set aside to the spouse and/or minor children. The Independent Executor will need to consult with his or her attorney regarding the appropriate amounts and procedure for setting aside such property, as well as to whom it is properly paid. N. Review Assets Held by the Estate. Although an Independent Executor s job is more limited than a trustee s job, since it is the Independent Executor s primary obligation to collect assets, pay bills and then distribute the assets (rather than investing them for a long period of time), the Independent Executor should nonetheless review the investments and assets of the estate to determine that there are no problem assets which need to be dealt with by disposition or otherwise. In most cases, an Independent Executor will have the power to sell assets. If the Independent Executor continues to maintain assets which are highly risky for the estate, the Independent Executor may find that the beneficiaries attempt to hold him or her liable for not behaving prudently with respect to the asset. O. Funding Specific Bequests. The Independent Executor should discuss with his or her attorney when specific bequests made in the will should be funded. If gifts of cash or dollar amounts are not funded within twelve months, the estate may need to pay interest to the beneficiary when the gifts are finally funded. Dealing with Claims by Creditors. One of the initial determinations that should be made by the Independent Executor is whether or not the estate appears to be solvent. In most cases, the debts owed by the decedent will be small in relation to the overall value of the estate, and it will be clear that there are sufficient liquid assets in order to be able to pay all creditors. In cases in which it appears that there may be more debts than assets in the estate, or in cases in which there is an issue as to whether the estate will be solvent or not, the Independent Executor should work closely with the attorney regarding the administration of the estate and the payment of debts. A. Ability to Pay Claims when Estate is Solvent. In general, an Independent Executor will classify and pay claims in the same order of priority, classification and proration described in the Texas Estates Code for dependent executors. TEXAS ESTATES CODE SECTION An Independent Executor is, however, free from personal liability from paying a claim at any time (to the extent it is approved and classified by the personal representative), if the claim is not barred by limitations and at the time of A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 13

19 payment, and the Independent Executor reasonably believes the estate will have sufficient assets to pay all claims against the estate. TEXAS ESTATES CODE SECTION B. Classification of Claims. Claims against an estate are classified and shall have priority of payment in the following order: 1. Class 1: funeral expenses and expenses of last sickness up to $15,000 (the balance of which will be paid as Class 8 claims); 2. Class 2: expenses of administration and expenses incurred in the preservation, safekeeping and management of the estate; 3. Class 3: secured claims for money (such as mortgages, car liens, etc.), so far as the claims can be paid out of the proceeds of the property subject to the lien; 4. Class 4: claims for delinquent child support and child support arrearages; 5. Class 5: claims for taxes, penalties and interests due to the state of Texas; 6. Class 6: claims for the cost of confinement through the Texas Department of Criminal Justice; 7. Class 7: claims for repayment of medical assistant payments made by the state to or for the benefit of the decedent; 8. Class 8: all other claims. Note: A federal statute gives claims of the United States government priority before all other debts of a deceased debtor. 31 U.S.C.A. SECTION 3713(A). Debts to the United States (such as tax payments) are not listed in the Texas statute, but an independent executor who fails to give priority to claims of the United States over other creditors is personally liable for those claims. Funeral and administration expenses are permitted to be paid first, since they are not considered to be debts of the decedent. In addition, family allowances are not considered debts and therefore take priority over debts due to the United States as well. C. Notices to Creditors. 1. Published Notice to Creditors. The Independent Executor must publish a notice to all persons having claims against the estate within one month after being appointed as Independent Executor. This is normally handled by the attorney. Proof of publication is filed in the court. 2. Notice to Holders of Secured Claims. Within two months of receiving letters testamentary, the Independent Executor shall give notice of the issuance of the letters to all persons having a claim for money against the estate that is secured by real or personal property of the estate. In addition, if the personal representa- A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 14

20 tive obtains actual notice of additional secured claims following that two-month period, the personal representative is to give notice to the person having the claim. An affidavit that these notices were given is filed with the court. 3. Permissive Notice to Unsecured Creditors. At any time before an estate is closed, an Independent Executor may give notice by certified or registered mail, return receipt requested, to an unsecured creditor having a claim for money against the estate, stating that the creditor must present a claim within four months after the date of the receipt of the notice or the claim is barred. Certain information must be included in that notice (a sample copy of which is attached as Exhibit D). TEXAS ESTATES CODE, SECTION This is a very useful method for the Independent Executor to notify credit card companies and other persons who might have claims against the decedent s estate. It enables the Independent Executor to know for certain whether claims will be made by any of the persons notified within the four-month period following notice. Otherwise, claims can continue to be made until the statute of limitations runs on the claim. D. Duty with Regard to Non-Probate Assets. In some cases, substantial assets will pass outside of the probate estate. The Independent Executor generally does not have access to these non-probate assets, but some of them may be subject to the debts of the decedent. If the probate estate is insolvent, but there are other assets subject to the creditors of the decedent, the Independent Executor may be required to proceed against certain types of non-probate assets. For example, if an Independent Executor receives a written demand by a surviving spouse, a creditor, or a person acting for a minor child of the decedent, within two years of the death of the decedent, the Independent Executor may be required to collect from a beneficiary who receives funds from a multiple party account (such as a joint and survivorship account) amounts owned in the account by the decedent immediately before his death, to the extent necessary to discharge debts, taxes, expenses of administration, and statutory allowances to the surviving spouse and minor children. IX. Sale of Estate Assets. A. Sale of Real and Personal Property. In most cases in which an Independent Executor is appointed, the will provides that the Independent Executor has the power of sale over the estate assets. This enables the Independent Executor to sell estate assets. Even in absence of a power of sale in the will, the Independent Executor will generally be able to sell assets if necessary to pay the debts of the decedent, or if it is otherwise in the best interest of the estate. In absence of a power of sale, the Independent Executor should consult with his or her attorney regarding the propriety of selling estate assets. B. Direct or Indirect Sales to Independent Executor. There are strict restrictions upon the ability of an Independent Executor to purchase, directly or indirectly, any A HANDBOOK FOR THE INDEPENDENT EXECUTOR Page 15